EU Regulator ESMA Bans Binary Options, Limits CFDs Leverage

In its latest move, EU Regulator ESMA bans Binary Options and decides to limit the marketing, distribution, and sale of CFDs to retail investors. The watchdog also has outlined a tiered leverage for brokers offering CFDs to clients.

27 March, AtoZForex The key regulator of the European financial markets, the European Securities Markets Authority (ESMA) has informed a public about its decision in regards to the leverage restrictions for the sector. In spite of the commentary from brokers and clients, the EU watchdog has moved to limit the options for leverage for retail brokers across the bloc.

EU Regulator ESMA Bans Binary Options

The decision of the European regulator constitutes the ban on marketing, distribution, and sale of the Binary Options. The regulator also made a decision to introduce tiered leverage for various financial instruments. In fact, any Contracts for Differences (CFDs) will need to meet strict requirements and presently, are temporarily limited to a set of regulatory rules.

According to the regulatory statement from ESMA, CFDs products are now facing a restriction on the marketing, distribution, and sale to retail investors. The regulator specifies:

“This restriction consists of: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm-specific risk warning delivered in a standardised way.”

ESMA CFDs leverage limits

Following on this, the ESMA has introduced a tiered leverage in several tiers. The EU supervisor decided to set out 30:1 leverage for CFDs on major Forex pairs, with non-major currency pairs and gold to be traded at 20:1, while other commodities and non-major indices will be given a 10:1 gearing.  Likewise, ESMA laid out a 5:1 leverage for individual equities and 2:1 leverage for cryptocurrency trading.

While EU Regulator ESMA bans Binary Options, other restrictions for the EU brokers offering CFDs include:

  • A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;
  • Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;
  • A restriction on the incentives offered to trade CFDs; and
  • A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

The EU regulator plans to adopt the new regulations on Binary and CFDs in the near future. The financial market participants can expect the measures to be effective in the coming weeks, following which ESMA will publish an official notice on its website. The measures will be published in the Official Journal of the EU and will be effective in one month for Binary Options and in two months for CFDs.

ESMA Chief’s Commentary

As EU Regulator ESMA bans Binary Options, regulator’s Chair, Steven Maijoor, has stated:

“The agreed measures ESMA is announcing today will guarantee greater investor protection across the EU by ensuring a common minimum level of protection for retail investors. The new measures on CFDs will for the first time ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide risk warning for investors. For binary options, the prohibition we are announcing is needed to protect investors due to the products’ characteristics.”

He has further added:

“The combination of the promise of high returns, easy-to-trade digital platforms, in an environment of historically low-interest rates has created an offer that appeals to retail investors. However, the inherent complexity of the products and their excessive leverage – in the case of CFDs – has resulted in significant losses for retail investors. A pan-EU approach is required given the cross-border nature of these products,  and ESMA’s intervention is the most appropriate and efficient tool to address this major investor protection issue.”

According to the official announcement, the decision of ESMA is caused by the will to safeguard retail investors. The regulator believes that the use of excessive leverage and Binary Options can be regarded as products with an expected negative return.

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